The Perils and Promises of a Popular Yet Controversial Financing Method

Tax increment financing has been used to build stadiums, libraries and parks.

Tax increment financing (TIF) is one of the most popular financing techniques in a locality’s toolbox. It’s also one of the most unpopular methods among some policy wonks. Intended to eliminate blight in the poorest neighborhoods, TIF projects are often criticized for funneling money away from core services and to neighborhoods that are neither blighted nor poor. But the problem with TIF isn’t the policy itself. When applied properly, TIF can bring the notions of value capture and financial accountability to public works.

TIF policies vary by structure. But generally TIF works like this: A municipality approves and floats bonds for a new amenity. Then the municipality draws a boundary around the area, estimating which properties will benefit from the amenity. To pay the debt, the municipality uses the added property or sales tax revenue -- called the “increment” -- that results from within the boundary.

TIF is controversial because it’s become a financing source, and in some cases a slush fund, for some municipalities to speculate on private redevelopment projects. In Chicago, up to one-sixth of the budget has been used for TIF projects, including construction of a Marriott and a Whole Foods. Many of urban America’s much-maligned stadiums and convention centers were funded through TIFs. Because TIF began as a blight combatant, it’s also been used for the controversial practice of performing eminent domain for private uses, such as when Detroit demolished a neighborhood for a GM plant.

But TIF isn’t all bad. A better use for TIF has been for core public works projects, such as libraries, parks, underground infrastructure and street improvements. Mass transit has been a particularly common TIF-funded amenity, which is fitting given that transit is generally built near intensive, revenue-generating uses.

There are several advantages to using TIF, rather than money from the general fund, for these public goods. First, it forces neighborhoods to fund their own amenities. People who benefit from proximity to a project via higher property values, added commerce, or use of that amenity, will actually pay for it. This matters in an age when struggling inner-city neighborhoods and outer suburbs alike resent funding downtown projects that have little to do with them, especially if that means their own services are cut. Second, TIF incentivizes governments to use the land within TIF boundaries for high revenue-generating purposes.

Of course, TIF doesn’t guarantee against boondoggles. But a third asset is that TIF, if structured properly, encourages accountability. If officials know that a project must pay for itself through added tax receipts in a specific location, they’ll be more cautious about what and where they build. And because TIF demands a before-and-after look at an area’s revenue levels, it clarifies whether an amenity has worked.

TIF is not the only value-capture option. Other options include special assessment districts, land value taxes and developmental impact fees. While varying in substance, all of these value-capture policies are much more pragmatic and targeted than simply funding projects willy-nilly through the general fund. The key is to use them on public goods, rather than on private real estate speculations that ultimately should be left to the market.